Despite historically low mortgage rates and relatively low home prices, the housing recovery continues to struggle to gain anything that resembles traction. While the housing sector is certainly headed in the right direction, it is hardly moving at the pace we had hoped for. The market’s momentum, or lack there of, may be attributed to the rate of employment. Low employment rates are hurting the housing sector recovery.
Of particular concern, however, is a recent report by the U.S. Bureau of Labor Statistics (BLS). According to the government entity, we are currently experiencing the weakest job participation rate since 1978. The lack of employed adults acknowledges why so many are barred from home ownership and why others are unable to stay current on their mortgage.
It is important to note that more young adults are entering the workforce, as employment rates have risen from 75 percent earlier this year. However, as of December, the employment rate was a far cry from where it should be. The recovery would likely benefit from an employment rate approximately five percent higher than what we are currently experiencing. Moreover, wage growth for said individuals has neglected to keep up with the inflation rate. According to the BLS, wage growth came in at just 1.8 percent for all of 2013. At this rate, wages can’t keep up with inflation. Participating in the housing market is becoming increasingly difficult for the average worker.
“Millennials have a long road ahead: The employment rate of 75.4 percent in December was closer to the low point during the recession, 73-74 percent, than to the pre-bubble normal, 78-80 percent,” noted Jed Kolko, chief economist at Trulia.
This data confirms the difficulties first-time home buyers are facing. They are, for the most part, being left out of today’s housing sector recovery. Tight mortgage underwriting fails to make the task at hand any easier, as new mortgage rules are making it much harder to receive loan approval. These rules are designed to protect borrowers by ensuring that they can repay their loans, but some claim the rules are far too stringent.
“A healthy mortgage market includes a certain amount of foreclosures for reasons other than medical, job loss or divorce,” said Jaret Seiberg of Guggenheim Partners in a note to investors. “Otherwise credit-worthy borrowers will be denied the ability to own homes.”
Weak job participation rates may also clarify why homes are still being lost to foreclosure despite the return of equity. As recently as December, 31 percent of all residential properties in foreclosure had some form of positive equity. That number is particularly encouraging, as it was up 24 percent from the previous quarter. The rise in equity is attributed to rapidly rising home values.
Foreclosures with equity have, on average, about 27 percent equity built up. That is enough to qualify for a refinance that could offer a lower monthly payment. However, to qualify, respective homeowners must have a job.
The only bright side from the weak December jobs report is that it could push mortgage rates lower temporarily, as investors rush to the safety of treasury bonds.